What is a cash out refinance and why do mortgage interest rates increase for these types of loans?
September 3rd, 2009 by refinancemortgagerates
A cash out refinance is any transaction where money is going to be disbursed directly or indirectly to the borrower above and beyond the payoff of the current mortgage and settlement costs. There are several key issues that are not obvious cash-out loans and I’ll cover those as well as exceptions. My answer should cover 99% of the loan scenarios out there. I’ll always have the disclaimer loan programs change daily and check with your lender for details.
Exceptions:You are allowed to receive up to $2,000 cash-back on a limited(no cash-out) fannie & freddie loans and also up to $500 under VA & FHA rate & term mortgage refinance loans.
Scenarios not obvious:If you are paying off a 2nd mortgage not used to purchase the property (such as a home equity loan) even though you are not getting any cash in hand at closing the loan is still considered cash-out under fannie and freddie guidelines.
Scenarios not obvious: If you are paying off other debts, such as credit cards and not receiving any cash in hand at closing the loan is still considered cash-out mortgage refinancing.
See If You Qualify…….!
The reason cash-out loans have higher interest rates is risk and equity. Since you’re taking cash-out you’ll have less equity to secure the loan making it more risky to lend and also if you’re taking cash-out of the home you are displaying tendency to use your home as an ATM and might not have the best spending habits. You also could be cashing out as much as possible before you let the home go back to the bank. Cash-out loans have higher default rates for these reasons and others the cause lenders to increase interest rates to offset losses.
There are credit unions, portfolio lenders and banks that do not sell loans to fannie mae and freddie mac and do not have higher interest rates for cash-out loans. As an industry standard that’s not the case.
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This entry was posted on Thursday, September 3rd, 2009 at 9:48 pm and is filed under Mortgages. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.